FeaturedNationalVOLUME 18 ISSUE # 14

Challenges after IMF package

Pakistan faces serious challenges even after the imminent revival of the International Monetary Fund bailout package. The country will have to adjust its economy to the changing times and remove flaws in the system, which force it to seek financial help from international institutions and friendly countries every three or four years.

According to Defence Minister Khawaja Asif, Pakistan has already defaulted and held the establishment, bureaucracy and politicians responsible for it. Speaking at a ceremony, he said, “You may have learnt that Pakistan is going bankrupt or that a default or meltdown is taking place. It has already taken place. We are living in a bankrupt country.” It is an admission that Pakistan’s expenses are more than its earning and it will have to reverse the tide to become a viable state and provide relief to its people. “The solution to our problems lies within the country. The IMF does not have the solution to our problems,” the minister suggested.

According to Moody’s Analytics, a bailout from the IMF alone is unlikely to put the economy back on track. “Our view is that an IMF bailout alone isn’t going to be enough to get the economy back on track. What the economy really needs is persistent and sound economic management,” senior economist Katrina Ell said in an interview. She warned that there’s still an inevitably tough journey ahead. “We’re expecting fiscal and monetary austerity to continue well into 2024. Even though the economy is in a deep recession, inflation is incredibly high as a result of the latest bailout conditions. So, what we’re expecting is that through the first half of this year, inflation is going to average about 33% and then might trend a little bit lower after that,” she observed.

The economist also warned about rising food prices and poverty in Pakistan. “Food prices are high and they can’t avoid paying for that, so we’re going to see higher poverty rates as well feed through. Pakistan has not had a great track record when it comes to IMF bailouts, so infusing additional funds alone may prove to be of little use. If we’re going to see any improvement, it’s going to be very gradual. There’s just no overnight fix,” she noted.

A weaker rupee, which has plunged to record lows, is adding to inflation. Economists fear the Pakistan currency will depreciate further. “It is likely that we will see further monetary tightening in Pakistan to try and stabilize inflation and also with the weakness in the FX they might kind of intervene there to try and force in stability, but again it’s not going to be a silver bullet,” the economist said.

On the other hand, the Fitch Ratings agency sees a very high level of default risk for Pakistan. It downgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC-’, from ‘CCC+’ due to worsening liquidity, political volatility and decline of foreign-exchange reserves to critically low levels. The global rating agency said it did not typically assign outlooks to sovereigns with a rating of ‘CCC+’ or below. In a note defining its action, Fitch explained that the downgrading reflects further sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels.

It said that shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate have held up the 9th review of Pakistan’s IMF programme, which was originally due in Nov 2022. “While we assume a successful conclusion of the 9th review of Pakistan’s IMF programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view,” it noted.

According to the report, “The IMF’s conditions are likely to prove socially and politically difficult amid a sharp economic slowdown, high inflation, and the devastation wrought by widespread floods last year. Elections are due by October 2023, and former Prime Minister Imran Khan, whose party will challenge the incumbent government in the elections, earlier rejected an invitation by Prime Minister Shehbhaz Sharif to hold talks on national issues, including IMF negotiations. Funding from bilateral donors was also contingent on the IMF programme. Recent funding stress has been marked by the apparent reluctance of traditional allies — China, Saudi Arabia and the United Arab Emirates — to provide fresh assistance in the absence of an IMF programme, which is also critical for other multilateral and bilateral funding.”

The rating agency forecast a modest recovery during the remainder of FY23 due to anticipated inflows and the recent removal of the exchange rate cap. “However, we expect reserves to remain at low levels,” the report said. Pakistan’s external debt maturities in the second half (January-June) of FY23 is over $7bn. This requires financing for payments or rollover from the lenders to minimise risks. Fitch said remittance inflows could also recover after they were partly switched to unofficial channels in 4Q22 to benefit from more favourable exchange rates in the parallel market.

The recent reports point out serious flaws in Pakistan’s economy. They also highlighted persistent political instability, which hinder efforts to revamp the economy. It is high time all political parties and national institutions joined hands to find ways and means to steer the country out of the present mess. Efforts should be made to help the country stand on its feet in the minimum possible time. It needs urgent action, not rhetoric.